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Digital nation on the rise: Profiting from China's Internet revolution

December 2011

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Yuval Atsmon, Vinay Dixit, Max Magni, Laxman Narasimhan, and Cathy Wu

Most marketers recognize the far-reaching impact the internet has had on Chinese consumers: on their leisure time, on the time spent researching new brands and products, and, increasingly, on how they spend their money. Some companies have already begun to leverage the internet to build brands and generate marketing buzz, while others are figuring out how to turn clicks into cash.

The numbers are dazzling: China has more than 400 million internet users and is already the world’s second-largest market for e-commerce. Yet new McKinsey research shows that the internet in China is poised for a new wave of rapid growth and change, creating enormous opportunities while posing fresh challenges for global marketers. Companies that can develop a more granular understanding of China’s internet users and their behavior will be best positioned to profit from these changes.

China’s internet users as of June 2010—more than five times as many as in India and nearly twice as many as in the U.S.—and it was adding new users at a rate of 6 million a month.

For Chinese consumers, the internet is already an important, even routine, part of making a purchase; they use it to understand products they are thinking of buying and to hunt for bargains. Even among the majority who have so far spurned e-commerce, their use of the internet to research purchasing decisions is nonetheless extensive. Making predictions about China can be a dangerous game, but what can be said with certainty is that all the online trends are for more—more access, more opportunity and more consumers using it in more ways.

Consider the following statistic. About two-thirds of Chinese have been online for three years or less, and half for less than two—and in the past it has taken about three years for an internet user to become an online shopper. Assuming that this conversion continues—if anything, it should accelerate as payment methods and delivery systems improve—tens of millions of new e-commerce consumers could be just around the corner.

Since 2005, McKinsey Insights China has conducted exhaustive annual research on the Chinese consumer; the 2010 study is the most comprehensive yet. We interviewed more than 15,000 consumers in 49 cities on their spending profiles; buying factors; brand attitudes; and channel and media preferences (including e-commerce and online media) across different product categories. In a different study, earlier this year McKinsey surveyed 5,000 online users in China (and another 8,000 in India and Malaysia) to understand how they experience the digital world. Finally, we have interviewed senior executives at leading local and multinational consumer companies to learn what they wanted to know about China and the internet.

As with most things in China, the numbers are staggering. As of June 2010, China had 420 million internet users—more than five times as many as in India and nearly twice as many as in the U.S.—and it was adding new users at a rate of 6 million a month. About half of China’s urban population uses the internet, and one in every seven rural residents. By 2015, we expect urban internet PC penetration to reach 66 percent, similar to that of Western Europe today, and rural penetration to double to close to 30%. All told, there will be more than 750 million internet users, including mobile internet users, which are expected to increase rapidly with the proliferation of cheaper and faster mobile devices.

However dramatic the numbers are, it’s at least as striking how quickly the internet has woven itself into the texture of daily life. More than 75 percent of users agreed or somewhat agreed that “I cannot live without the internet.” The ways people use the internet are rich and diverse, with a clear bias toward entertainment; even among those who have been online for less than a year, 90 percent stream music or video.

On average, Chinese consumers spend about 19 hours a week on the internet—four hours streaming video or music (about twice as much, in relative terms, as in the U.S.); another four hours on chatting and instant messaging (10 times as much as in the U.S.); four hours on online shopping; three hours on gaming; 2.5 hours on social media, 1.5 hours on reading news; and less than 30 minutes emailing (compared to five hours for Americans). Similar to the U.S. and even some emerging Asian markets such as India and Malaysia, clearly the time consumers spend on digital content comes at the expense of traditional media. In this report, we examine how Chinese consumers use the internet; what they think of it as an advertising and research medium; and how they are shopping online. Finally, we identify several important digital capabilities companies need to master to realize the full potential of this medium in China.